Lower Taxes Asset Separation and Segmented Depreciation

Were you one of the millions of American who purchased rental properties in 2006? If so, you might be due for a major tax break. According to Stephen Fishman, author of Every Landlord’s Tax Deduction Guide, substantial tax savings may lie in the floor beneath your feet, or even in the shrubs outside your building. You can find these savings by separating your assets and accelerating your depreciation. Until recently, this idea was not very popular among Americans. IRS data shows that 78% of small real estate investors don’t bother to accelerate their depreciation deductions, and as a result it is estimated that investors will overpay more than five billion dollars in taxes this year.
You can use an asset separation to increase your cash flow by accelerating your depreciation-related tax deductions. This process involves reviewing the costs that a taxpayer incurs to acquire, construct, or improve real estate. You must identify personal property assets that are often lumped together within the Real Property asset category. Most commonly, these personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs. After separating assets from the building, personal property assets are reclassified to be depreciated over their specific depreciable class life, allowing real estate owners to maximize depreciation deductions and reduce their current income tax obligations. Simply put, asset separation allows depreciation of short life assets over a shorter period of time.
Small investors overpay very often because their resources are usually limited. For example, to accelerate depreciation deductions, investors must separate assets and reclassify them to their specific depreciable class lives. Many people do not identify their personal property assets for accelerated depreciation because they are either unaware of how to do so, unable to do it themselves, or cannot afford to have someone else do it. For a long time, asset separation services for accelerated depreciation were only available from private firms for larger investors. Many services require you to pay for a team of experts well-versed in accounting regulations and tax laws. Small real estate owners usually cannot “afford” to have a team accelerate their depreciation. Normally, they must conduct the asset separation on their own, a task that is too daunting for the average small investor to complete. Luckily for small investors, DepreciateEm was introduced by T-ReX Global Property Management Software in January as part of an ongoing effort to create simple solutions for busy individuals. Small investors can finally take advantage of accelerated depreciation, for free!
Say you purchased a rental property in 2006, and your basis was $200,000. Depreciating the $200,000 using a straight-line method over a period of 27.5 years will give you a depreciation deduction of $36,062 over the first five years. Using an asset separation, you value assets inside the home at $30,000. The property basis of $170,000 can be depreciated over 27.5 years, and the basis of 5-year property assets valued at $30,000 can be depreciated sooner. You will be able to deduct $60,652 instead of $36,062 over the first five years. For the average small real estate owner who pays a 33% federal tax on income, this is a savings of more than $8,000 in income tax. Certainly, this is a valuable opportunity that all small real estate investors will want to take advantage of.